The Force Field

Insurance is a good barrier to minimize the financial impact of the risks becoming real. Always remember that in LIFE, there is always the IF that we need to be shielded from. Don’t you want a force field to protect you the way Camp Big Falcon has?

During my childhood, I always looked forward to go home early on a Friday after school only to watch my favorite cartoon movie, Voltes 5. The weekly show was nearing its climax when it was abruptly banned. The story has a good twist but what really caught my fascination was the defense system of Camp Big Falcon. On a heavy attack, Dr. Smith will activate the force field. which acts as a barrier or shield to protect the base from the barrage of missiles sent by the Boazanian beast fighter. The force field served as a protection for the base to prevent it from being destroyed. Once the base is destroyed, Voltes 5 will be easier to destroy as it will always be exposed to enemy attack.

In the real world, a person will need all kinds of protection to prevent him from being harmed. He needs shelter to shield against nature’s threats. He needs an umbrella to during the rainy season. A politician needs a bodyguard as a shield against threats to his life. A child needs his parents for financial security.

In terms of personal finance, nobody can escape the need for protection, just like the fact that nobody can also escape death and taxation. There is only one instrument that can protect everyone financially. It is insurance, an intangible product that the majority of the population avoids talking about due to the feeling of morbidity.

How can insurance be similar to a force field?

1. Temporary income replacement. The life blood of the family is the breadwinner. He is the one generating the cash flow to meet the expenses of the family. As long as the breadwinner exists, the family does not need to worry about finances. Assuming the breadwinner is taken out of the picture, cash flow stops. This is where insurance becomes important. As long as the coverage is adequate (usually the estimate is 10 times the annual income), the family he left behind will be able to survive and maintain the same lifestyle as if he is still around. The family will surely miss him, but not his income. At the same time, the family has the luxury of time to find ways to grow the insurance proceed and try to find other source of income. In short, there is no panic. Insurance shielded the family away from poverty.

2. Provide money for estate taxation. When a person passes away, his assets will now be called estate. In death, the estate has to be transferred to the heirs. Note that when assets change hands, the government is always never absent. Every time money or any asset moves, there is a corresponding tax. In this case, the heirs have to pay the government tax to allow them to claim the estate of the deceased. This is called estate tax (sometimes called as death tax). If the deceased is not insured and the heirs are not capable of paying estate tax, the government can later claim it. With insurance, the heirs now have a ready cash to pay the tax without getting a loan or shelling out their hard-earned money. Insurance became a barrier that prevented them from losing their money to the government.

3. Provides money for critical illness treatment. Nowadays, we see a lot of young people diagnosed with grave diseases that previously afflicted the older generation. Progress has its drawback. Our world has become more polluted than before, thanks to the mismanagement of the human race. Getting critically ill is a surefire way to damage one’s personal finance. Health-care cost has dramatically outpaced the growth of income of the majority. Once critical illness strikes, a person’s savings can be wiped out and he may yet end up deep in debt just to be cured. If he is not cured, then he cannot pay his debt back and that spells trouble for the lender. By being insured, he shields himself (and his prospective lender) from headache and financial trouble.

4. Provides payment for home loans. Real-estate is booming nowadays as well as the financing business. Real-estate properties are marketed as investments and are offered via financing with a term of 15 to 25 years payment. To minimize risk, real-estate companies require buyers to get a Mortgage Redemption Insurance. This is simply a term insurance that pays the loan balance to the real-estate company in case the buyer dies within the paying period. As this protects the companies, this also protects the family. Upon death, the family need not pay a single cent as the insurance company takes responsibility for all the remaining balance yet unpaid. There is no more need to evict the family for failure to pay.

Insurance is a good barrier to minimize the financial impact of the risks becoming real. Always remember that in LIFE, there is always the IF that we need to be shielded from.

Don’t you want a force field to protect you the way Camp Big Falcon has?

Edmund Lao is a Registered Financial Planner of RFP Philippines. A sales engineer by profession, he is an advocate of financial planning.